Iowa Farmer Today
04-07-07
Ethanol demand changing corn market strategies
By Gene Lucht, Iowa Farmer Today
STEAMBOAT ROCK -- Another grain truck pulls into Pine Lake Corn Processors,
unloading its contents into bins that supply the ethanol-processing facility.
It’s a scene that repeats itself at ethanol plants and other grain facilities across
the Midwest every day.
But, with increasing demand and higher prices for corn comes more competition
from various buyers, who are all hoping to lock up supplies. That has meant
some changes in the way grain is bought.
However, most of the changes appear to be changes of degree or timing or
basis, notes Jim Stewart of Ag Marketing Systems in Truro.
“There’s a potential for a wide variance in basis,” he says.
One reason is many processors, including virtually the entire ethanol market,
want to spread their grain deliveries over the full year.
Most ethanol plants have only enough grain storage to last the plant about two
weeks. That means they need to lock in constant deliveries over the full year,
and that means using the futures market.
But, with many local buyers who all have limited storage the basis could vary
dramatically through the year.
“In Iowa, the geography of where people are sourcing corn is starting to shift a
bit,” adds Ray Jenkins, Iowa Corn Marketing Manager for Cargill Sweeteners
North America.
That geographic change is affecting basis.
For example, Cargill in Eddyville traditionally has bought grain in Southeast Iowa
and as far north as U.S. Highway 30. It now may need to go farther because it
faces more competition from ethanol plants going up in its traditional buying area.
Traditionally, Jenkins says, there has been a difference in basis of about 15
cents between Eddyville and Central Iowa.
“That spread has vaporized,” he says.
In turn, that means farmers and buyers need to re-think their price structures and
grain contracts. It also means basis numbers may bounce around much more
than in the past.
If farmers in one part of the state five years ago could count on the basis being
20 cents in their area, they no longer can count on that being a fair figure. Today,
it might be 20 cents one week and 2 cents a few weeks later.
Throw in the fact more ethanol facilities are going up every day, and the basis
number turns into a constantly moving target, a more elusive figure than in the
past.
Those basis and constant demand needs have translated into several trends,
according to Steve Johnson, Iowa State University Extension farm
management specialist.
=More grain is being priced further into the future. Buyers want to lock up a
supply, and farmers looking at $3.50 corn are willing to price bushels far into the
future.
=The basis is becoming a more important part of some grain sales contracts.
=There are many nuances built into some contracts as incentives. For example,
some long-term contracts may include the buying price protection.
Think of it as a portfolio approach, Johnson says. Buyers are filling out a portfolio
and buying protection as part of that portfolio.
Farmers who sell may be working in a similar fashion, using a program that
automatically includes buying puts or calls as protection.
Of course, when it is part of a package program, farmers might want to make
sure they are getting the full benefit of such protection.
=The livestock industry also needs grain, and there may be some grain delivery
contracts that are used primarily buy livestock producers.
For example, Stewart says it has been reported from parts of the South, livestock
producers are buying corn in the field in a pre-harvest by-the-acre contract so
they can have the option of harvesting the grain as silage.
Also, there are some programs, such as the one offered by Cargill for several
years that include incentives to build on-farm grain storage.
Jenkins says there are trade-offs in that specific program which could affect
price. But, when demand is high, farmers might see a variety of specific
incentives included in grain bids that are not directly related to price.